Broke vs broken up

While I was looking into household debt recently, I ran across a striking fact. In the year ending March 2003, more Americans went bankrupt than got divorced. There were 1.6 million bankruptcies in the year, about 40 per cent of which involved couples, implying around 2.2 million people going bankrupt. There were around 1.0 million divorces, or about 2.0 million people getting divorced. This (or maybe the year before, the divorce stats are a bit fuzzy) is the first time bankruptcies have exceeded divorces, at least since the Depression. The increase in bankruptcy has been exceptionally rapid. As recently as 1985, there were only 300 000 personal bankruptcies a year.

Obviously the increase in bankruptcy is due, at least in part, to the increase in household debt arising from financial deregulation. On the other side of the coin, increased use of credit has meant that consumption inequality in the US has not grown nearly as fast as income inequality.

Rather than trying to weigh up the costs and benefits of all this, I thought it would be good to consider some of the social implications. The first is that, if this trend continues (and since debt is growing more rapidly than ever, it must do so for some time), bankruptcy must become a very common life experience. In fact, it seems reasonable to project a situation in which most people go bankrupt at some time in their lives, and a significant number go bankrupt more than once. Obviously the social stigma that is still attached to bankruptcy would have to dissipate, just as it has with divorce.

Society has survived the advent of routine divorce and no doubt it will survive the advent of routine bankruptcy. Interest margins will go up, and credit may be a bit harder to get, but there’s no reason to suppose that a situation where, say, two in every hundred adults goes bankrupt annually is financially unsustainable. Interest margins will go up, but they are already high enough to modest increases in default rates.

The big effects, if any, will be the spread of the kinds of attitudes associated with bankruptcy, whatever they are. Because bankruptcy was rare until recently, the proportion of Americans who have had first-hand experience of bankruptcy, either by going bankrupt themselves or having parents go bankrupt is still small – I’d guess no more than 5 per cent of all adults. But it must rise and do so rapidly. In the absence of huge changes in patterns of debt and credit, at least 50 million people will go bankrupt in the next twenty years, and quite possibly 100 million.

There are of course, efforts to make bankruptcy more difficult and to resist the view that bankruptcy is ‘just another financial planning tool’. The US Congress has been struggling for years with a Bankruptcy Reform Bill that would make things easier for creditors, particularly the credit card companies who are, of course, the main backers of the Bill. But the failure to pass the Bill is instructive in itself. In any case, it’s hard to see how such efforts can make permanent headway against the kinds of numbers I’ve cited above. When everyone and their brother or sister has gone bankrupt, the process must be ‘just another financial planning tool’.

Where the US leads, the rest of the world commonly follows. Certainly the growth in household indebtedness is not peculiar to the US. So will bankruptcy become a routine event for Australians?

Bankruptcy rates in Australia rose rapidly from the mid-80s to the mid-90s, but then leveled out. This was partly due to the fact that, until the recent housing boom, Australians had not joined the trend to growing indebtedness and the appreciation in house prices since then has kept most out of trouble. In addition, the Howard government introduced a process called debt agreements, which are, in effect, an alternative form of bankruptcy requiring a deal with 75 per cent of creditors (by value). Still it seems likely that bankruptcy rates will go up sharply as soon as the housing bubble bursts.

John,
Since it is fairly topical, I raised a question regarding the housing bubble bursting in relation to Ken Parish’s post on baby boomers’ investment habits,etc (your blog reference previously). Will it burst as conventional wisdom says, or will the quantum leap in Oz house prices be largely sustained? (ie a one off ratchet effect)

Could Oz house prices be sustained for the following reasons- 1. A general demographic overhang of investible savings by empty nest, baby boomers looking for a safe refuge. 2.’Old capital’ countries viewing Oz real estate as historically undervalued in an unprecedented climate of globalisation and free capital movement. 3. Safe haven effect on globalised capital flows, looking for terrorist free investment.

If Oz house prices are sustainable and growing, then will Oz baby boomers find this a double-edged sword? On the one hand they have/will become asset wealthy, only to discover the need to transfer this wealth to their off-spring, before retirement, in order to get them out of their own homes at a sensible age? Any thoughts about the Big Mac price comparisons and trends?

There was once a social stigma to going bankrupt, just like divorce. But if you don’t care about that (and the more people go bankrupt, the less stigma there will be, just like divorce) then bankruptcy will really become just another financial planning tool.

And if 40 per cent or so of the population goes bankrupt at least once in their lives, just like divorce, what are the banks going to do? Decide not to lend to 40% of their potential market? I think not. You’ll be able to have a history of bankruptcy and still the banks will shower you with offers to gear up to buy off-the-plan inner city apartments.

Dude, those are BUSINESS bankruptcies as well as personal bankruptcies.

Also, those statistics are from a commercial site ENCOURAGING PEOPLE TO FILE FOR BANKRUPTCY. (“Helping people get a fresh financial start.”) It’s in their financial interest to overstate the frequency of bankruptcies.

I speak from recent, personal experience on this. There is no real social stigma (at least in my peer group. My parents are a whole different story…) to declaring a BK here in the U.S. My attorney advised that I think about it as a financial and legal status that exists for a finite period of time, and then goes away. I think one common MIS-perception is that filing BK allows someone to spend absolutely freely and absolve themselves of all debts.

This is simply not the case. Not every debt can be excised, and most are agreed to be paid at significantly reduced rates and principles. Secondly, your trustee payment (the person who handles your ascribed financial affairs during the BK) becomes your single most important payment each month, sans rent and groceries. One missed payment can invalidate the court’s ruling and allow creditors to come after you for all the original claims PLUS interest.

In a way, I have more faith in people who’ve completed a BK for two reasons: they’ve obviously made their trustee payments on time for a number of years, and they’re not too interested in retreading the path to bankruptcy in the first place.

Recently I along with a few others were featured in a press release from the Associated Press Entitled “Donors dark Side” Four years ago I donated a kidney to my younger brother. I have had surgery twice since than to correct muscle damage from wear the kidney was harvested. As a result I have lost a career job of 17 years as well as my retirement, insurance and have restrictions as to what kind of work I can do now. I currently live in Myrtle Beach and work in a Deli which is about to go under do to the economy. I am in desperate need of Financial aid or will be force to go Bank Rupted. The country seems to always go to the aid of others and at times fail their own right here at home. I am asking with a humbled heart for your help in securing a grant to help me pay some dept and save my deli. I am also asking for help to make living donation safer for future donors so they too don’t have to experience the kind of problems me and many others have had. A $50,000.00 grant would help me get a new start. I am pleading with you for your assistance in this matter. Sincerely yours,
Walter J. Wood